The repository of one hard-boiled egg from the south suburbs of Milwaukee, Wisconsin (and the occassional guest-blogger). The ramblings within may or may not offend, shock and awe you, but they are what I (or my guest-bloggers) think.

Well, you’re wrong – Neumann property tax edition

On Spike TV’s “MXC”, a humorous dub of Tokyo Broadcast System’s “Takeshi’s Castle”, the Captain Tenneal character had a catch phrase he used right after he asked the contestants an opening question. That phrase, “Well, you’re wrong,” applies to both the Mark Neumann campaign’s sales pitch of his property tax shift and some of the critics of that plan.

First things first, it is not a tax cut (with a possible exception which I’ll address as a concern in a bit). Rather, it is a shift of when the property taxes are paid. Instead of the 2011 property tax (the first bill that would be affected by Neumann’s proposal) being paid either at the end of 2011 or over the first 5 months of 2012, it would be paid over the course of the entirety of 2012.

On a related note, the “no other enterprise waits an entire year to bill for services” bit is a bunch of smoke and mirrors. Who here has paid their entire 2010 income tax? Who filed their 2010 income tax return back in April? Indeed, because the property tax bill comes in December of the named year with the ability to settle the entire tax bill before the end of the year, the dating of a particular property tax bill makes more sense than the dating of the income tax bill, which cannot be settled in full until sometime in the following year.

Indeed, Neumann’s plan, unless he simply decides to call the 2011 property tax the 2012 property tax, makes it worse. Instead of waiting a maximum of 17 months (to the end of the following May) for the final payment, one would wait a full 2 years for the final payment.

As for the criticism that the tax deductibility would be lost, that also is false. For those that itemize on their federal income tax return, the amount paid in property tax is deductible on the same year’s tax return that the property tax is paid, regardless of the date on the property tax bill. The reason why a lot of people pay their property taxes in full in December is that they don’t want to wait two return cycles to deduct the property tax payment. In fact, I am sure there are some people who wait to pay one year’s property tax until January (or even May) and then turn around and pay the next year’s property tax in December to get effectively a “double” reduction on the second year’s income tax.

As for the plan itself, there are two concerns I have. The first is that, once an owner decides to get in, there’s no way out, not even for a new owner.

The second relates to the liability of the previous owner in a sale. Currently, tax liability for the previous owner extends to the month of the sale. Neumann was unclear on whether that means the previous owner gets to walk away from a year’s worth of taxes or whether that owner has to pay property taxes on his or her old property for 12 months after the sale.

Beyond that, I could just as easily flip a coin weighted slightly against the proposal. Offering a smaller per-payment tax bill that is paid more often will allow property-taxing authorities to grease the skids for a bigger property tax hike.

2 Responses to “Well, you’re wrong – Neumann property tax edition”

Neumann’s plan eliminates 2 bubbles, resulting in the property tax being kept in the economy instead of with the government or with mortgage banks (likely in NY).

The first bubble is the escrow accounts. Every month, a mortgage holder pays the 1/12 of the property tax into an escrow account along with the mortgage. Under Neumann’s plan, this entire “bubble” is returned to the property owner at the end of 2011. In 2012, the property owner pays the exact same way, just to the municipality instead of the escrow account, resulting in 1 full year’s worth of extra money in their hands.

According to page 832 of the Wisconsin Bluebook, 71% of property tax is paid by homeowners [http://www.legis.state.wi.us/lrb/bb/09bb/pdf/621-862.pdf]. Assuming 2/3 pay mortgage, that’s 50% of property tax payers that will greatly benefit from Neumann’s plan – according to the numbers in Neumann’s plan (you should read it once), that’s ~$6 billion.

The second bubble is the state’s savings account that buffers the property tax payments to the municipalities. Assume 100% of the 2011 tax is paid by Jan 31, 2012. This money is kept in a bank account that municipalities draw from as needed throughout 2012. Under Neumann’s plan, this money is returned to the property owners, and the municipalities get 1/12 of the property tax paid directly to them every month (there is still a $1 billion buffer in the state’s savings account — look into tax credits paid by the state). Sure, there are negatives to not having this money in the state’s bank, but 100% of fiscal conservatives will agree that putting the money into the hands of property owners is much better than keeping it with the state.

For the non-escrow property owners, in January 2012, they would have 100% of their property tax more than they would have without Neumann’s plan. In June 2012, they would have 50% of their property tax more than they would have without Neumann’s plan. In Dec 2012, it’s pretty much even for them, but it jumps right back up to 100% in January 2013.

So, there you have it. Proof that Neumann’s plan injects a ton of money into the Wisconsin economy in early 2012. If you don’t want to call it a tax cut, that’s fine — just acknowledge that is has the same economic effect as a tax cut.

Oh, comparing property tax to income tax to call Neumann’s analogy of government to business is complete crap. You simply compared government to government in order to pull your own “smoke and mirrors” trick (blatant re-use of Walker’s talking points).

Regarding the homeowner half of the shift, kindly answer this question – who is responsible for the 12 months’ worth of taxes not yet paid when the house is sold, the seller or the buyer? Be aware that I will ask a follow-up based on your answer.

As for the municipal half of that shift, I wasn’t going to bring that up, but since you insisted on bringing it up, I will. What do you suppose the net effects of losing the interest on the “prepaid” taxes and shifting the collections of said taxes to a monthly schedule will be? If you said higher taxes to pay for borrowing because the money isn’t there in the summer months when most of the municipal bills come due, give yourself a cigar.

I could very easily have broken very bad into Neumann’s plan by calling it the same kind of shift that Jim Doyle and the Democrats have done with the state budget to make it appear to be in balance, but I didn’t.